June 17, 2008

Sales Soar For Low-Cost Internet Telephone Device

Any idea which company is the fastest growing fixed-line telecom firm in the United States? If you guessed Verizon Communications Inc., or AT&T Inc., you'd be wrong. Perhaps some might guess Comcast Corp., the nation's fastest-growing cable voice provider with blazing growth in its phone service business. But that guess would also be incorrect. 

The answer is YMax, a company unheard of by many, but whose MagicJack product is now selling 8,000 to 9,000 units per day. The MagicJack is about the size of a matchbox, and plugs into a PC. A "Ëœregular' phone is then connected to MagicJack, and using a broadband connection the device allows the user to send and receive calls just like a normal landline phone.

YMax began an aggressive advertising campaign in January, when only a few hundred units per day were being sold.   The company is now on track to have 500,000 subscribers by the end of June, a spectacular growth rate in the telecom world. 

MagicJack's success can be attributed to its price. At $39.95, which includes one year of free calls to the U.S. and Canada, it offers a strong competitive alternative to traditional landline phone service. Additional years of MagicJack service are priced at $19.95.

"It's extremely low-risk. Most people I know are willing to gamble on 40 bucks," TeleGeography analyst Stephan Beckert, who follows voice-over-Internet (VoIP) providers, told the Associated Press.

YMax is different than most VoIP providers in that the firm is licensed as a phone company in the continental U.S. and runs its own large network of servers to carry calls. Typically VoIP providers will outsource that part of their business.

Comcast attracted 7,100 new customers per day, on average, during the first three months of this year, ending the quarter with 5.1 million voice subscribers. Vonage Corp., the leading independent VoIP provider that works with regular landline phones, was averaging 334 per day for a total of 2.6 million.

Becker called YMax's subscriber numbers "significant," but noted that its revenue is much lower than that of its competitors because YMax's annual service charges are equivalent to only about a month of service from rival providers.

Even eBay Inc.'s Skype charges substantially higher prices.

MagicJack's effect on its competition is unclear. The company's CEO, Don Burns, said many customers purchase a MagicJack as a complement to a cell phone, in order to compensate for poor cell coverage areas. When the computer is off, YMax's service can forward incoming calls to a cell phone.

YMax was founded by Burns, former CEO of Telco Communications Group, a discount long distance telecom service provider, and inventor Dan Borislow, who pioneered AOL's long-distance service in the 90s. The telecom-industry veterans largely financed YMax themselves.

Burns told the Associated Press the company's structure helps maintain low costs and high service quality. Future plans include selling advertising that would be displayed on the PC screen as calls are being placed. Relevant ads would be selected according to the customer's location.

But Beckert is skeptical of the business model.

"I'm still not sure how you make money at $20 a year," said Beckert.

Like YMax, Vonage has for years attracted its customers through TV advertising and consistently lost money. YMax has plans to get MagicJack seen on the shopping channel QVC, in order to augment its Web and call center sales. 

"We have big-box retailers jumping at this," Donlon said.